Question 4 (10 marks) Cape Steel Technologies produces a variety of steel products. The Steel Division manufactures a single standardized component. Some of its output is sold externally and the remainder transferred to the Mills Division, where the component is used as an input in its manufacturing process. Unit costs of the Steel Division are as follows: R Direct material 8.80 Direct labour 4.40 Other direct expenses 4.40 Variable manufacturing overhead 4.40 Fixed manufacturing overhead 8.80 Variable selling expenses 2.00 Total cost per unit 32.80 22 000 units of the Steel Divisions products are sold externally at a standard price of R 66.00 per unit. 11 000 units are transferred internally to the Mills Division at a transfer price of R64.00 per unit. The transfer price is obtained by deducting variable selling expenses from the external selling price. 9 HMAC200-1-Jan-June2023-SA1- CTM-V.2-06012023 The Mills Division uses the component to manufacture its final product. The unit costs of this product are as follows: R Component Steel Division 64.00 Direct materials 50.00 Direct labour 6.60 Variable overheads 26.40 Fixed overheads 26.00 Variable selling expense 2.00 175.00 The manager of the Mills Division is disputing the method used to determine the transfer price of the component. The manager believes that the transfer price should be calculated as variable cost plus an agreed mark-up. In light of this, head office undertook an investigation of the relationship between demand and selling price of each division. The findings are as follows: The Steel Division The Mills Division Selling price per unit R Units sold Selling price per unit R Units sold 44.00 33 000 176.00 15 800 56.00 22 000 198.00 11 000 70.00 11 000 220.00 6 000 The manager of the Mills Division is of the belief that this investigation proves his point, and that a transfer price of R 26.40 would be appropriate, as it would give the Steel Division a reasonable contribution to cover its fixed costs while allowing the Mills Division to earn a profit. In addition, he says that it would increase output and improve overall company profits. 10 HMAC200-1-Jan-June2023-SA1- CTM-V.2-06012023 Required: Determine the effect of the existing transfer pricing system on company profits by calculating the following: 4.1 The variable cost per unit of sales outside the group (3 marks) 4.2 Optimal output of intermediate product for sales on external market (7 marks)